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Depreciation and Block of Fixed Assets (under Income Tax Act)
First of all, let’s understand what is Depreciation. In simple term, over the period an asset’s value reduces due to wear & tear and that reduction in value is called Depreciation.
Primarily there are two conditions to claim Depreciation on any asset. First one is person shall be the owner and another is must be used for the purpose of business. Ownership can be wholly or partially. Depreciation will be proportionately allowed in case where the asset is used for business purpose as well as personal purpose. One important thing to consider here is, only half depreciation will be allowed if asset is used less than 180 days.
Depreciation is a mandatory deduction under Income Tax. Generally, Depreciation is calculated on Written Down Value (WDV) of Block of Asset under Income Tax. However, Entities engaged in generation & distribution of power are allowed to claim depreciation as per Straight Line Method (SLM).
Now, let’s understand, what are SLM & WDV Methods??
Under SLM Method Depreciation is calculated by dividing the difference between an asset’s cost and its resale value at the end of its useful life by the number of years it is expected to be used.
Where under WDV Method Depreciation is charged at a fixed rate on the value after deducting depreciation which is called Written Down Value (WDV).
Following will be helpful to understand above:
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Machine’ Cost: Rs.500000, Salvage Value: Rs.20000, Useful life: 10 years, Depreciation Rate: 15%
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Year
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Straight Line Method
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Written Down Value Method
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Depreciation
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Depreciation
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1
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500000 - 20000
10
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Rs.48000
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(500000 – 0) x 15%
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Rs.75000
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2
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Rs.48000
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(500000 - 75000) x 15%
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Rs.63750
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3
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Rs.48000
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(500000 - 75000-63750) x 15%
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Rs.54187.5
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From above table we can also conclude that in Straight Line Method depreciation will remains same for each year but in case of Written Down Value Method depreciation amount is higher in starting years. However, Total amount of depreciation over the life of one asset will remain same under both methods.
BLOCK OF ASSETS
When we say block of assets it means group of assets belongs to same class and have same depreciation rate. There are lots of people who don’t understand this concept and making block only on the basis of rate of depreciation. It is very clear that assets belong to same class and have same rate of depreciation too then only it will be grouped as a block.
As per Income Tax Act there are five class of assets which is as follows:
1. Buildings;
2. Furniture and Fittings;
3. Machinery and Plant;
4. Ships; and
5. Intangible Assets.
For Depreciation rate of above assets, you can refer following link:
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Asset1
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Depreciation Rate
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Asset2
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Depreciation Rate
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Block???
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Building
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5%
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Building
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10%
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Cannot be in single block because both building have different rate of depreciation.
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Building
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10%
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Furniture
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10%
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Depreciation rate is same for both asset but both belongs to different class so cannot be in single block.
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Building
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40%
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Building
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40%
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Yes, these will be grouped as single block (same class and same depreciation rate).
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Furniture
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10%
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Furniture
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10%
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Yes, these will be grouped as single block (same class and same depreciation rate).
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Prepared and compiled by
UDAY DHAVAL
Kotwani Anil Kumar & Associates (KAKA)
Chartered Accountants
A-73, Lajpat Nagar-2,
New Delhi-110024
Disclaimer: Above article is true and complete to the best of our knowledge. It is our interpretation of law, others may take different opinion or view.
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